Friday, July 17, 2009

Will Toronto Be The Next Capital of Angel Investing?

According to the "Global Entrepreneurship Monitor", Canada only ranks 9th in the world in angel investment. I have no idea who or what the Global Entrepreneurship Monitor is (I am scraping the data from our own National Angel Organization's website) but I have to believe this ranking is based on incomplete and dated information. There are a number of indicators which would suggest that, in the last two years, Canada in general and Toronto in particular has been racing to the top of the pack.

Now, I'm basing my suggestion in part on the sheer volume of angel deals that have churned through our office over the last two years. I figure, if our firm has only a percentage of the addressable market of angel deals in Ontario, then using fancy math, this would extrapolate to practically exponential growth in this area.

There are a number of key drivers of the growth in angel investment in Ontario, that would support this theory, including the following:

- the giant sucking void of seed and pre-seed capital, matched only by the sucking void in public market returns. For many angels, this makes the opportunity cost of placing money in private companies acceptably low.

- new government pools of capital (the Accelerator Fund, IRAP, the Emerging Technologies Fund, to name a few) that are designed to help fill the funding gap. These help mitigate against the risk that there may not be additional growth money available for angel investees.

- the emergence of an angel community, led by the National Angel Association and various angel investor groups who, through broad based public marketing, have marketed angel investment as an asset class unto itself. This has created a kind of validity about the investments that directs new angels to action.

The result is an emerging set of Ontario angels with unique characteristics:

- The angels writing big checks are not, generally speaking, active participants in the local angel community. They find their deal flow through their own focus and interests, rather than community events. The most active Ontario angels are high net worth individuals with successful track records in high tech or traditional industries who have the resources to provide follow-on funding themselves if required. This can protect an investee that is doing well against any shortage of venture capital.

- Ontario angel investments are often purpose driven. They invest because they want to be a tangible part of solving a particular problem - in detecting or treating disease, for example, or in removing a stumbling block that has stymied their own industries for years. (This leads me to wonder whether the Diabetes or Kidney foundations, to name a few, find themselves losing funds from past donors who favour more personal interventiion through investing.)

- Angels who are purpose driven tend to provide more rigourous oversight of a company's execution of its business plan. (This is not the same as providing operational support - more on that in another post.) They also tend to be more effective evangelists of the business.

- Ontario angels are remarkably patriotic. They believe in contributing to Canada's place as a technology leader.

- While Ontario angels are patriotic, they are not insular. Many have invested outside of the region, andhave leveraged the resulting networks for the benefit of local investees.

This is the kind of skill set that most start-up regions can only dream of. It also suggests we are developing Ontario angels that will be long term participants in seed investing. Stay tuned

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